It is a common question for those on the cusp of retirement: Do I have enough money saved? Of course, if you’re concerned that you might not, you can’t go back to the beginning of your career and change your savings rate. But all is not lost. In fact, there may be a relatively easy solution: Work a bit longer.
A few years ago, a study on this topic came to a remarkable conclusion: For some people nearing retirement, working even a little bit longer than planned could have the same benefit as having saved a higher percentage of income over the last three decades of their careers.
In this article, we’ll take a closer look at that study and explore the implications for any near-retirees who are not as prepared as they would like to be.
An appealing premise
In 2018, Stanford economist John Shoven and several former students issued a headline-grabbing report titled, The Power of Working Longer. The key takeaway from their research was this: “Delaying retirement by three to six months has the same impact on the retirement standard of living as saving an additional one percentage point of labor earnings for 30 years.”
For anyone nearing retirement with the fear that they haven’t saved enough, this came as a tremendous relief. A few more months of work seemed like a small price to pay to make up for decades of under-saving.
However, as with any research, the output is only as good as the input. To understand the results, it’s essential to know what assumptions went into the research. In this case, that takes some of the shine off the study’s overarching finding. Still, there are important (and encouraging) implications for those nearing their intended retirement date without adequate savings.
The research world
Shoven and his colleagues designed their study around a “stylized” (theoretical) worker we’ll call John, using the following key assumptions:
John, who is not a particularly high-income earner, began saving for retirement at age 36, contributing 6% of his pay and receiving a 3% employer match for a total of 9%;
He plans to retire at age 66, which, for Social Security purposes, is his full retirement age;
John claims Social Security at the beginning of his retirement.
He uses all of his retirement savings to purchase an inflation-indexed annuity with 100% of the benefit continuing for the surviving spouse after the first spouse’s death.
The power of waiting
The study’s conclusion — that working just three to six months past John’s intended retirement date would equal the benefit of having saved one percentage point more of his income for the past 30 years — resulted primarily from the higher Social Security benefit he would receive by waiting.
The second most important factor is the higher annuity income that would result from waiting. The older you are when purchasing an annuity, the more monthly benefit you can buy with the same amount of money. By delaying retirement, John’s retirement savings may be higher as well, which would further increase the monthly annuity benefit he could purchase.
The real world
Of course, the assumptions baked into the study may be quite different than the particulars of your situation. For example:
You may have a higher or lower income than John;
You may have started saving for retirement earlier or later;
The performance of your retirement portfolio may be better or worse than John’s;
You may be planning to retire at a younger or older age;
You may be planning to claim Social Security benefits at an earlier or later age than John;
You may not be planning to use all of your retirement savings to purchase an annuity (nor would we recommend that!), and inflation-indexed annuities are no longer available.
Still, if you are nearing retirement, are concerned that you may not have enough money saved, and are planning to claim Social Security benefits before age 70 (the age at which benefits are at their maximum), working longer — even a little bit longer — could meaningfully increase your monthly retirement income.
Show me the money
For each month you delay claiming SS benefits past full retirement age, your eventual monthly benefit amount increases by two-thirds of 1% — or 8% per year. Therefore, when you eventually file, your monthly inflation-adjusted benefit will be significantly higher than if claimed earlier.
Said differently, waiting beyond your full retirement age to claim SS benefits is essentially “buying” yourself (and potentially your spouse) an increasingly attractive inflation-adjusted annuity. That is an extremely compelling offer.
Working longer could increase your retirement income in other ways too. For example, it will enable you to contribute more to your retirement portfolio. If you plan to annuitize a portion of your retirement account, waiting to do so will either increase the monthly benefit you would receive for the same investment or cost you less for the same benefit.
Of course, waiting will shorten the amount of time you spend in retirement as well, meaning your savings won’t have to stretch as far.
Your mileage will vary
Will delaying your retirement by three to six months give you as much benefit as having saved another one percentage point of your income all these years? It’s a difficult calculation to make, but it doesn’t really matter. What matters is that you are where you are.
If you wish you had more in savings in order to have more retirement income, see how much your monthly Social Security income will increase by putting off retirement for 3, 6, 12, or more months. If an annuity factors into your plans, get some quotes to find out how that income would change by waiting as well. (Several brokers have annuity income estimators on their websites, including Fidelity and Schwab.)
If your health and employment prospects allow, working longer is a very effective option for increasing retirement income.
